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Credit Score

This Credit Score Guide Can Help You Save Thousands on a Loan

Last Updated on May 15, 2017

Ben is the resident wordsmith and grammar guru at Fundera. He makes sure their top-notch content stays accessible, interesting, and useful for small business owners. Previously, Ben wrote for the Columbia Spectator and eBay's curatorial team.

Maybe you need another vehicle or two. Or an updated, state-of-the-art piece of equipment. It could be that stellar employee you just interviewed, or it might be you’ve done the math and it’s the right time to double your inventory.

Personal credit scores usually range from 300 to 850. Here’s the breakdown of what each bracket means, generally speaking:

Excellent: 781 – 850

Good: 661 – 780

Fair: 601 – 660

Poor: 501 – 600

Challenged: Below 500

Now that you understand what a credit score is, it might seem a little clearer why it matters.

What’s the Big Deal with Your Credit Score?

Like we said, your credit score measures your reliability.

Why?

Lenders—including banks—are using those questions and numbers from earlier to decide, based on your past habits, whether you’ll repay future loans.

Here’s a simple analogy:

If your friend always asks to borrow a few dollars for coffee whenever you get together, but only pays you back half of the time…

You’re probably going to stop financing their caffeine.

Similarly, if a lender sees that you generally pay your loans back late, they’re much less likely to offer you their business.

And why would they? It’s their money they’d be trusting you with.

It’s not a perfect science, and different lenders have different thresholds for what credit scores they need to see…

But overall, your credit score is a good measure of how you repay your debts, what kind of credit you look for, how well you understand the amount of debt you can actually take on, whether you’ve successfully avoided bankruptcies and tax liens, and more.

Essentially, the factors that determine whether you’re a good borrower. And since your small business is just that—small!—your personal financial habits will match up with your business’s.

When we put it that way…

It makes total sense why a lender would care about your personal credit score.

Your Credit Score Guide to How Your Credit Impacts Your Financing

Lenders care about your credit score.

OK, great—got it.

But exactly how will your credit score affect that business loan you’re looking for?

Not all loans are created equal—and not all borrowers can qualify for the same kinds of financing.

So what determines whether you qualify for this loan or that?

There are a lot of factors—from your annual revenue to how long you’ve been in business for—but if you’ve read this far, you can probably guess the big one…

That’s right: your credit score.

According to data we gathered from 2,500 loans, totaling roughly $140 million distributed to over 22 million small business owners (for our Q1 2016 quarterly report), your credit score is a major factor in your loan eligibility.

(Note that this chart only shows the interquartile ranges, or the data between the 25th and 75th percentiles, in order to highlight the average experience.)

Which means the higher your credit score, the more choices you have. There are still business loans for bad credit, but as you can see, the loan products with the highest credit score requirements also have the lowest APRs.

So, more about that…

Understanding Your APR

Before we get into the relationship between your credit score and your loan’s cost, let’s hold a quick Credit Score Guide review session:

In other words, your APR measures how much a loan will cost you over the course of a year. This means you can compare loans of different term lengths and still understand how their costs relate.

But how is your APR different from your interest rate?

Another good one!

Your interest rate just calculates how much interest you’re paying on the principal—or the amount you’re borrowing.

APR, on the other hand, takes into account things like:

Closing fees

Origination fees

Insurance costs

Underwriting fees

Processing fees

Document preparation fees

Application fees

Not every lender includes these extra expenses, but some do—and the APR is where you’ll see how those costs affect your loan’s price tag.

Okay… So why is the APR important?

Well, let’s put it this way:

If you’re shopping for a car, you wouldn’t just buy the first one you find, right?

Nope—you’d compare options and prices to get the best deal.

You should be doing the same for business loans…

And that’s where APR comes in. Because a loan’s APR takes all of its costs into account and averages them out to a year, you can compare drastically different loans without winding up confused or mistaken.

APR gives you the true cost of your loan—and takes the guesswork out of the process.

So, how about those credit scores?

2. Better Credit = Lower Rates

Like we saw above, there’s a definite relationship between credit score and APR.

That’s going from $125 each day with the merchant cash advance—or $2,750 per month on average—to $2,872 once per month. For 4 times as much money.

Needless to say…

Improving his credit score went a long way for this entrepreneur’s small business.

Ways to Improve Your Credit

This wouldn’t be a credit score guide if we didn’t help you improve your credit, would it?

Here are some tips to raising that all-important three-digit number:

1. Pay your bills on time.

This is the most important factor to get in control of. If you’re regularly making late payments—or missing them altogether—then you’re hurting your credit score in a big way.

Check if you can set up automatic deposits or create a calendar and reminder system that will keep you on track. Whatever works—as long as you’re paying your debts back in a timely way.

2. Don’t default.

This might seem obvious, but defaulting on your loan will seriously impact your credit score. Sometimes there’s no other option—and that’s probably why you’re in this position in the first place—but consider alternatives, like borrowing from friends or family, if you’re trying to raise your credit score.

3. Limit your spending.

Your credit utilization is how much of your available credit you actually use.

(And at the same time, you’re also creating a buffer for your business credit, which you’ll want to start building up, too.)

6. Keep old accounts active.

The average age of your credit accounts is actually an important factor in determining your credit score.

So if you’ve got an old credit card you never really use…

Keep the line open!

Dish that card out once a month—and make sure to pay it off—because the older your credit history, the better.

This also comes into play if you’re considering paying a loan off early.

Chances are, that won’t have a big impact on the average age of your open accounts…

But if it does, then you might want to think about paying it off according to schedule.

7. Diversify your credit.

Although your credit mix doesn’t count for too much—just 10% of your credit score—it can be a factor that helps your credit score get that extra much-needed bump.

Instead of sticking to one type of loan, don’t be afraid to rely on credit for multiple reasons. You’ll prove to potential lenders that you know how to juggle a few payments at once, budget appropriately, and plan for the future:

All important skills to being a small business owner and a reliable borrower.

8. Limit your credit applications.

It’s a myth that your credit score gets hurt when you check it…

But applying for a few different loans at once?

That can definitely make an impact.

When you apply for a loan or credit card, your lender will carry out a hard credit check, which means they’re taking a close look at your credit report—and, as a result, you might receive a small penalty of 5 points or so.

This isn’t a punishment, though. It’s to prevent you from shopping for, say, a business loan and a car loan and a mortgage all at once.

That’s a pretty unsustainable amount of debt to take on—and, chances are, you won’t be able to manage it all.

However, you won’t get penalized for rate shopping: if you apply for a bunch of the same kind of loan within a certain time period, your credit score is safe.

***

You’ve seen the data. You’ve read the success stories. And you understand how your credit score works.

Now, what are you waiting for?

Go out and save your business some money!

Editorial Note: Any opinions, analyses, reviews or recommendations expressed in this article are those of the author’s alone, and have not been reviewed, approved, or otherwise endorsed by any of these entities.

Ben is the resident wordsmith and grammar guru at Fundera. He makes sure their top-notch content stays accessible, interesting, and useful for small business owners. Previously, Ben wrote for the Columbia Spectator and eBay's curatorial team.